Qtum is an open source public blockchain that is built on the UTXO model of Bitcoin but operates like Ethereum with the only difference that it runs on a Proof of Stake (PoS) consensus mechanism. Compared to Ethereum’s proposed Casper model for PoS, Qtum’s combination of the UTXO model plus a PoSv3 consensus protocol makes it significantly more expensive for bad actors to hijack the network.
This is because the Bitcoin Core is the most thoroughly tested and secure blockchain code in the world, with billions of dollars of trust within the network and millions of dollars spent each year for the developers to maintain and enhance it. The only drawback of Bitcoin being that it is limited to be used as a payments system only. Ethereum on the other hand has got many use cases but the source code is not as stable and secure as Bitcoin’s source code.
This article has been written to explain the Proof of Stake consensus mechanism in general and also specific to Qtum’s network. We will also be discussing the steps for staking your QTUM tokens on CoinDCX.
What is Proof of Stake (PoS)?
The Proof of Stake (PoS) consensus mechanism is the most common alternative to the Proof of Work (PoW) consensus mechanism that works in a way similar to how a company works. Each member of the company has certain shares of the company and that determines their voting rights. The more the number of shares held, the more is the voice heard. In case of PoS mechanism, the stake is defined by the digital currency operating in the blockchain. Although block creators are chosen randomly, the proportion of blocks created by a particular stakeholder is determined by his ownership of the stake in comparison to the other stakeholders in the system. Moreover, the entire block creation process in a blockchain network goes virtual. In a PoS, one node is elected to validate a particular block. This reduces the competition as well. Another difference between PoS and PoW is that in a PoS mechanism, there are no Miners or Mining. Instead, there are Validators and they either Mint or Forge. Although this mechanism is less secure than PoW, the energy consumed to provide consensus is surely very low.
Similar to mining pools, staking pools are also formed to increase their chances of validating blocks and receiving rewards. Staking systems allow delegation in which each individual delegates their voting rights to a trusted party. Those delegates then earn all the rewards for the block validation and later reward their supporters in the form of returns.
Staking is one of the easiest ways of earning passive income. Before we understand how the reward system works, let us first understand how the PoS works in Qtum.
One of the major features of Qtum’s smart contract solution is implementing PoS in place of PoW as currently used on the Bitcoin and Ethereum blockchains. A major hurdle standing in the way for the widespread adoption of smart contract-based Dapps is their inability to be managed by a light client. A light client may be defined as a node on the blockchain network that does not keep a full history of the blockchain. Instead, every time you log on, it only traces back a few of the most recent blocks in the chain to verify transactions. An example of a light client could be a mobile phone.
Although light clients have not been acknowledged in conjunction with smart contract management, creating, deploying, and altering a smart contract would require you to run a full node of the network. In cases where you had slow connections, low storage, or used a mobile phone, smart contracts could not be available.
Qtum changed that and opened the door for smart contract management from your mobile phone or on a new computer within a quick time frame. This is possible because Qtum uses UTXO technology that enables simple payment verification or SPV. This enables light clients to verify transactions easily and with no need to run a full node. Infact, you could even run a smart contract from your mobile in a few taps, thus bringing the disruptive technology of blockchain to mobile applications.
Qtum is built on PoS Version 3 which is an improved version of 1 and 2. This type of Proof of Stake (PoSv3) is built for UTXO based blockchains. Let us discuss more about them here.
Unlike PoW, where each node fights to get a target hash value for the block, POSv3 has a kernel hash, which is composed of several pieces of data that are not readily modifiable in the current block. The second transaction of Qtum is called the coinstake transaction whereas the first transaction is called the empty coinbase. The coinstake transaction as mentioned above has some specific rules it must follow. Moreover, each block must have exactly one staking transaction. The block timestamp must have the bottom four bits set to 0 so that the blocktime can only be represented in 16-second intervals. Finally, each UTXO can be used only once in every 500 blocks which approximates 24 hours to produce a staking transaction.
For each block that is produced, the block producer gets 4 QTUM, as well as the transaction fees and gases as a block reward.
The PoS system has a kernel hash which is built on the following data :
- Previous block’s “stake modifier” (hash of the previous transaction in PoS blocks and previous block’s stake modifier).
- Timestamp from “prevout” transaction (the transaction output that is spent by the first vin of the staking transaction).
- The hash of the prevout transaction.
- The output number of the prevout (ie, which output of the transaction is spent by the staking transaction).
- Current block time, with the bottom 4 bits set to 0 to reduce granularity. This is the only thing that changes during the staking process.
Source – Official blog page of Qtum
A prevout transaction is the UTXO that is used to create a staking transaction. The only way in which we can change the current kernel hash (to mine a block) is by changing the UTXO that you are using to create the block or change the current block time.
Another important aspect that has been changed in the mining process is the difficulty involved in the process. The PoS difficulty comes out to be twice as easy to achieve when you stake 2 coins as compared to just 1 coin. This is important because otherwise people would be encouraged to create tiny UTXOs for staking which would unnecessarily increase the size of the blockchain and ultimately affect the maintenance of the blockchain due to increased demand for resources. Not to forget, this will spam the network which will lead to compromising the security of the network.
To learn more about Proof of Stake, you could read this blog post by Jordan Earls
Steps for Staking on CoinDCX
Step 1 – Log in to your CoinDCX account and click on the Stake button under the Earn dropdown list. In case you do not have an account, click here to see the tutorial on how to create an account on CoinDCX.
Step 2 – You can either deposit QTUM from external wallets. This could be done by clicking on the “Deposit” button.
This directly takes you to your wallet where you can get the QR code to your wallet or the public key to your wallet that can be shared with anyone who will be sending their QTUM in your wallet.
Or, you can also buy QTUM from the spot market. At the time of writing, QTUM is available in the following pairs — QTUM/BNB, QTUM/BTC, QTUM/ETH, QTUM/USDT. To know more on how to trade altcoins on CoinDCX’s wallet, click here.
Staking your QTUM tokens on CoinDCX’s platform does not even need a third step. Please note that none of your QTUM tokens will be locked.
As per staking records, the annual percentage rate (APR) of return on QTUM is 6%-10%. Staking is, therefore, a very easy and simple way to earn passive income.
To know more about Stake, click here.